CBP is Held to its Administrative Position

Mark K. Neville, Jr.

One of the foundational principles of the US administrative law is the notion of “exhaustion of administrative remedies.” Simply put, that means that a party to an administrative proceeding cannot raise an argument for the first time during a judicial review after the matter has been concluded at the administrative level and is now undergoing that court scrutiny. One reason for that approach is equitable—it is unseemly to allow a party to launch a surprise attack in court if the argument had not been crafted and presented at the administrative proceeding below. Another policy rationale is that it would lead to disjointed proceedings, possibly requiring remands back to the agency and injecting a healthy measure of uncertainty at the administrative proceeding in the first instance. Then, too, it would lead to the reviewing court being asked to render a decision on the basis of new facts or arguments and not simply reviewing the administrative decision on the basis of the complete record below. We can find an extension of this concept in the antidumping and countervailing duty law context, wherein an interested party which had not participated at the administrative proceeding before the Commerce Department is denied standing to challenge the result at the Court of International Trade (CIT).

We do not reach here a discussion of the notion of a trial de novo, the principle under which the CIT is enabled to conduct a full review of its own of a challenged Customs and Border Protection (CBP) determination of other customs law elements such as tariff classification or customs valuation. It is on that basis that the CIT reviews the denial by CBP of protests filed by importers and others.¹

We find that Congress has also set down for de novo review enforcement actions at the CIT brought by the government as plaintiff for the collection of civil penalties imposed by CBP under Section 592 of the Tariff Act of 1930.² As you might imagine, Congress has specified a strict protocol under which “592 cases” are to be conducted. The recent decision by the CIT in United States v. Toth³ creates for us the perfect opportunity to witness the “goose--gander” rule⁴ in the full flush of its vigor here.

Toth Case Background

The case was grounded in an alleged attempt in 2004 and 2005 to evade the levy of antidumping duties that would have been assessed against the importation of crawfish from China. CBP took the view that the importations were deliberately misclassified as langostino which was outside the scope of the antidumping order and which in fact was eligible for duty free entry.

In 2010, CBP concluded that the importer’s misclassification of the merchandise was fraudulent. CBP issued a pre-penalty notice, and later a penalty notice. The government sought to enforce its penalty and to collect the penalty by bringing an action at the CIT in 2015.

19 USC § 1592

The “workhorse” customs penalty statute is Section 592, codified at 19 USC § 1592. That statute penalizes the actions of importers and others who make use of material and false documents, or who make a material omission, in entering, introducing or attempting to enter or introduce merchandise into the US. The important point to grasp at the outset is that the statute sets forth three alternative levels of culpability. These may be characterized

Fraud--the person intended to defraud the government or simply knew the information provided was false and submitted it anyway
gross negligence—the person demonstrated no attempt to verify the accuracy of the statements, had no internal control program, showed reckless disregard
negligence—the person was wrong but could show that some efforts had been made.

Since the 1993 “Mod Act,”⁵ the line is crossed into the possible raising of a penalty case against the importer at the negligence level if he cannot show that he met his “reasonable care” obligations.⁶ In other words, merely being wrong should not lead to a penalty—what is important is that you must have some justification for your position. You will recognize that in asking whether the importer had been “reasonable” Congress is hearkening back to the common law’s “reasonable man” standard, i.e., prompting the proverbial query, “What would the man on the Clapham bus do?”

You will also recognize the differences in culpability set forth in the statute are real and significant, with commensurate penalty levels being similarly distanced, and that these differences are not all that nuanced.

The statute sets out protections for the importer, in the sense that the process to be followed mandates that CBP must give the importer adequate notice of what is being alleged, including a recital of the level of alleged culpability at the pre-penalty and the penalty phases.⁷

Toth at the CIT

Even though the penalty proceeding conducted by CBP only alleged fraud, the government’s complaint at the CIT contained three separate counts relating to Toth’s culpability for the misclassification. Count I alleged that the misclassification was “the result of fraud” because the Toth and a co-defendant “knowingly misclassified the subject crawfish entries as duty free langostino.”

Count II alleged that, if the misclassification was “not the result of fraud, then [it was] the result of gross negligence . . . because [Toth and his co-defendant] misclassified the subject crawfish entries as duty free langostino with reckless disregard for the law.” Alternatively, Count III alleged that, if the misclassification was not “the result of fraud or gross negligence, then [it was] the result of negligence. . . because [Toth and his co-defendant] failed to exercise reasonable care in misclassifying the subject crawfish entries as duty free langostino.”

Obviously, the three levels of culpability impose three very different tests—intentional action viz. reckless disregard viz. no reasonable care. The government was seeking to cover its bases, in the sense that if it failed to meet the test for a finding of fraud by a proof of knowing misconduct, it could come back with a second line of attack and even a third line.

Toth explained that the pre-penalty notice and subsequent penalty notice at issue indicate that the level of culpability is “fraud.” At no point in the penalty proceeding did CBP ever notify Toth of a change to the level of culpability in the penalty at issue, as would be required under § 1592(b)(2) if CBP had changed or added a level of culpability. Accordingly, “it is clear that [CBP] determined that the level of culpability was fraud, and not negligence or gross negligence.” Toth argued that the “Complaint in this case is solely grounded on enforcement of [the above penalty notice] alleging fraud.” Based on these facts and on the precedent of the Nitek 2015 Federal Circuit decision,⁸ Toth sought the dismissal of the gross negligence and negligence counts. For its part, the government sought to have the court order a remand back to CBP presumably to allow the agency the opportunity to widen the penalty case against Toth by alleging the alternative claims.

The Toth court observed that

In Nitek, the Federal Circuit affirmed this court’s decision to grant a USCIT Rule 12(b)(6) motion to dismiss counts involving levels of culpability that CBP failed to allege in the underlying penalty notice…The court reasoned that[t]he language of the statute and the legislative history support a reading that penalty claims based on fraud, gross negligence, or negligence are separate claims and the [Government] cannot independently enforce a penalty claim in court for a culpability level that was not pursued administratively by [CBP]. . . . This means that each culpability level is a separate claim and [CBP] chooses which culpability level or levels to assert against the importer. …And the Government has no “power to independently bring a claim that [CBP] did not allege.” …Consequently, if not addressed in the underlying penalty notice, claims based on gross negligence and negligence “simply do[] not exist” before this court. (citations omitted)

The Toth court went further. In dismissing the request for a “voluntary remand” the court noted

There is no third option allowing the court to either (1) deny that claims exist but remand anyway or (2) refuse to grant or deny the motion but remand anyway. The Government exhibits great chutzpah to propose this third option. And the reason is clear. Nitek mandates that the Government has no claims for gross negligence or negligence before this court, because those claims exist only if CBP developed them through the penalty claim pursued in this court. Given that the Government has no claims under Nitek, and there is no relevant underlying agency proceeding or record, there is nothing to remand.

Conclusion

We have seen the practical differences between intentional misconduct and grossly negligent or negligent conduct, albeit in a civil law context. Memo to those concerned —the criminal code sets out a bright line distinction in levels of culpability between intentional and grossly negligent conduct, cf. 18 USC § 793 (e) v. 18 USC § 793 (f). The plain terms of the latter subsection of the Criminal Code, in contrast to the former, do not require a proof of intentionality. Accordingly, the absence of any finding of intentionality on the part of a person being investigated under this statute provides no justification let alone an explanation for not proceeding on a subsection (f) basis.

This aside is actually quite fresh and the foregoing discussion should demonstrate that it is not a gratuitous, veiled political comment. Rather, it is grounded in the Toth case, which was all about CBP wanting to change the scope of the CIT’s review of its civil penalty action by changing the level of alleged culpability, perhaps, or in fact probably, because the government was fully aware of the difference in proofs required for the various culpability levels.

What is clear for Section 592 cases is that, even in the context of a de novo review by the CIT, the government is going to be held to the determination it reached at the penalty proceeding at the agency. What is less clear is whether CBP would be entitled to proceed against an importer at the penalty proceeding on the alternative bases that the government sought in Toth.

A reading of the statutes⁹ would seem to indicate that, in the course of the Section 592 proceeding, CBP must itself ultimately choose one culpability level or another and, being so tied to that culpability level, must ultimately seek one specific penalty or another rather than leaving those choices to be made later by the court. In other words, even if a remand would have been granted, would Congress have endorsed CBP’s making such a fickle “either/or” notice and ultimate determination in the context of a Section 592 proceeding? I have not researched the point, which was not raised in Toth, but the foreseeable repercussions of such a course rank it as worthy of some study.

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1. 28 USC §§ 1581 (a) and 2640(a)(1).

2. 19 USC § 1592, and specifically subsection (e).

3. Slip Op. 16-61 (CIT 2016) (June 20, 2016).

4. The even-handedness of the rule, “what is sauce for the goose is sauce for the gander,” ensures that a law or other prescription will apply equally to both parties in a dispute.

5. The Customs Modernization and Informed Compliance Act, Section 637 (a) of Pub. L. 103-182, Act of December 8, 1993, 107 Stat. 2200.

6. 19 USC § 1484 (a).

7. 19 USC §§ 1592 (b) (1) (A) and (2).

8. United States v. Nitek Electronics, Inc., 806 F.3d 1376 (Fed. Cir. 2015).

9. 19 USC §§ 1592 (b) and (e).